David Weidner made a fair point when he called large bank stocks “the biggest sucker’s bet on Wall Street today” earlier this week. But if we dig deeper into the industry, there are plenty of regional banks that have done well for shareholders.

“Every year brings a new prediction” by fund managers that big banks will outperform the market, Weidner said, as he skewered the perennial argument by sell-side analysts that the group should be bought because shares are trading at such low price-to-earnings ratios.

The lack of trust for the big banks, the depressed returns on equity and the continually low interest-rate environment have taken their toll.

Among the “big six” U.S. banks, only Wells Fargo & Co.
WFC, -0.26%
has outperformed the S&P 500 Index
SPX, +0.59%
since the end of 2005.

This table shows the average returns on average equity for the big six banks over the past four quarters, along with returns on common equity (ROCE) for 2005:

Clearly, the world has changed for the big banks. An eventual improvement in interest-rate spreads will help, but the higher capital requirements and other regulatory restrictions make it seem quite unlikely for the big six to achieve ROCE close to 20%.

Regional winners

If we look at the largest 100 U.S. banks by total assets, 89 have been publicly traded since the end of 2005, and these nine have outperformed the S&P 500:

As you can see, Wells Fargo measures up quite well. It’s among the banks that have beaten the S&P 500’s return since the end of 2005, and its average ROCE over the past four quarters ranks third on this list.

Here are forward price-to-earnings ratios for the group, based on consensus 2015 EPS estimates:

For the most part, the regional banks listed above aren’t cheap, when compared with P/E valuations ranging from 9.6, for Citigroup Inc.
C, -0.18%
to 13 among the big six.

But once again, Wells Fargo fascinates. It’s included along with the small regional banks because of its long-term outperformance, and it is the second-cheapest on a current-year price-to-earnings basis on the above list of long-term winners. Its ROCE over the past four quarters has been considerably higher than that of Prosperity Bancshares Inc.
PB, +0.08%
which has the lowest P/E.

Many of these banks benefitted from heavily discounted government-sponsored acquisitions of failed or greatly troubled peers, with stock performances boosted by resulting gains. For example, Bank of the Ozarks Inc.
OZRK, -0.99%
acquired four failed banks during 2010 and another three the next year. The company’s acquisition spree has continued, as it has increased assets by 65% over the past year. Meanwhile, its stock has returned 30% over 12 months.

Wells Fargo more than doubled in size and gained a truly national branch network when it bought the foundering Wachovia for $15.1 billion in stock.

Signature Bank
SBNY, -0.67%
of New York is following an organic growth strategy, driven in part by the recruitment of commercial-lending teams from competitors. Over the past year, the bank has boosted its average commercial loan portfolio by 34% to $18.1 billion. First-quarter net interest income climbed 20% to $222.5 million.

The next step

If you are considering scooping up a regional bank stock or two as a long-term play on continued economic growth and an improving interest-rate environment, you need to do additional research to understand each bank’s business focus and prospects.

Looking at the most recent annual report will shed light on whether the bulk of the strong performance for the banks listed above was brought about by the wave of FDIC-assisted purchases, which has pretty much come to an end. But as we see with Bank of the Ozarks, continuing an acquisition-based growth strategy can pay off handsomely for shareholders.

A further look at quarterly earnings releases will shed light on organic-growth strategies. You should also ask your broker for research reports for further details on growth prospects.

Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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